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Public investment: another (different) look

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  • Roberto Perotti

Abstract

Using a structural Vector Autoregression approach, this paper compares the macroeconomic effects of the three main government spending tools: government investment, consumption, and transfers to households, both in terms of the size and the speed of their effects on GDP and its components. Contrary to a common opinion, there is no evidence that government investment shocks are more effective than government consumption shocks in boosting GDP: this is true both in the short and, perhaps more surprisingly, in the long run. In fact, government investment appears to crowd out private investment, especially in dwelling and in machinery and equipment. There is no evidence that government investment “pays for itself” in the long run, as proponents of the “Golden Rule” implicitly or explicitly argue. The positive effects of government consumption itself are rather limited, and defense purchases have even smaller (or negative) effects on GDP and private investment. There is also no evidence that government transfers are more effective than government consumption in stimulating demand.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 277.

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Date of creation: 2004
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Handle: RePEc:igi:igierp:277

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Cited by:
  1. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
  2. Suescun, Rodrigo, 2005. "Fiscal space for investment in infrastructure in Colombia," Policy Research Working Paper Series 3629, The World Bank.
  3. Jérôme Creel & Francesco Saraceno & Paola Veroni, 2007. "Has the Golden Rule of Public Finance Made a difference in the UK," Sciences Po publications 2007-13, Sciences Po.
  4. Nicoletta Batini & Luc Eyraud & Anke Weber, 2014. "A Simple Method to Compute Fiscal Multipliers," IMF Working Papers 14/93, International Monetary Fund.
  5. Duarte Bom, P.R. & Ligthart, J.E., 2011. "Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules," Discussion Paper 2011-092, Tilburg University, Center for Economic Research.
  6. Ivan Tchakarov & Roland Straub, 2007. "Assessing the Impact of a Change in the Composition of Public Spending," IMF Working Papers 07/168, International Monetary Fund.
  7. Ferreira, Pedro Cavalcanti Gomes & Araújo, Carlos Hamilton Vasconcelos, 2006. "On the Economic and Fiscal Effects of Infrastructure Investment in Brazil," Economics Working Papers (Ensaios Economicos da EPGE) 613, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  8. Guillermo Perry & Luis Servén & Rodrigo Suescún, 2008. "Fiscal Policy, Stabilization, and Growth : Prudence or Abstinence," World Bank Publications, The World Bank, number 6818.
  9. António Afonso & Peter Claeys, 2006. "The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain," Working Papers Department of Economics 2006/26, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  10. Calderon, Cesar & Serven, Luis, 2010. "Infrastructure in Latin America," Policy Research Working Paper Series 5317, The World Bank.
  11. Anita Tuladhar & Markus Bruckner, 2010. "Public Investment As a Fiscal Stimulus," IMF Working Papers 10/110, International Monetary Fund.
  12. repec:spo:wpecon:info:hdl:2441/2681 is not listed on IDEAS
  13. Jérôme Creel & Francesco Saraceno & Paola Veroni, 2006. "Estimating the impact of public investment in the united Kingdom : Has the Golden Rule of Public Finance Made a Difference ?," Sciences Po publications info:hdl:2441/2681, Sciences Po.
  14. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2007. "Staatsverschuldung wirksam begrenzen. Expertise im Auftrag des Bundesministers für Wirtschaft und Technologie," Occasional Reports / Expertisen, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, number 75368.
  15. Roberto Perotti, 2008. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 169-226 National Bureau of Economic Research, Inc.

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